When fossil fuel subsidies are anything but

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Renewable energy campaigners were quick to welcome a European Court decision to ban the UK’s electricity capacity auctions last week. The court ruled that the auctions – which are designed to ensure that additional capacity is available at times of high demand (such as during the “Beast from the East” event last March) – are a form of “State Aid” that is unlawful under European law.

Since the scheme has largely favoured combined cycle gas turbine power plants that can be rapidly brought on line when other forms of generation fail, it is often misunderstood to be a fossil fuel subsidy. For example, the Guardian cites Labour’s Alan Whitehead, shadow energy minister:

“This judgment effectively annuls previous state aid permission to provide subsidies for existing fossil fuel power plants. I have long criticised this bizarre arrangement, which simply throws money at old dirty power stations.”

A more sinister comment comes from Sara Bell, founder and CEO of Tempus Energy:

“This ruling should ultimately force the UK government to design an energy system that reduces bills by incentivising and empowering customers to use electricity in the most cost-effective way – while maximising the use of climate-friendly renewables.”

If this does not appear sinister at first reading, it is because neither Whitehead nor Bell appears to understand the reasoning behind the capacity auction scheme; which is, in large part, a subsidy to renewable energy.

At present there is no form of energy storage that can provide long-term balancing of the UK’s intermittent renewables. By long-term, I mean storing additional summer energy (when demand for heat and light is lower) in order to provide the additional capacity required during a winter cold snap when the wind isn’t blowing and the sun isn’t shining). Pumped hydro helps to some degree, but without flooding the valleys of Scotland, Wales and Northern England, there is no way of providing adequate pumped storage capacity. Meanwhile even the biggest and best batteries can only offer a few hours of backup rather than the several days that would be required. In these circumstances, gas provides the most efficient, cheapest and cleanest means of ironing out intermittency for the foreseeable future.

Because the UK operates a quasi-market in gas, demand and supply are balanced with price. When supplies are low and demand is high, spot prices can spiral out of control; as we reported following one such emergency two years ago:

“According to Kiran Stacey at the Financial Times, the situation that arose on Monday night was the result of several coal plants being taken offline at a time when demand was high. The result was that National Grid had to take emergency action to keep Britain’s (household) lights on. First, they dramatically increased the price of electricity in order to goose supply and dampen demand: ‘Power prices jumped to £1,250 per megawatt hour at one point as the company that runs the UK’s electricity network rushed to make sure there was a big enough gap between demand and supply. The normal price per MWh in the summer is about £50’.”

When the opposite conditions arise, the result is that the spot price can fall to zero and beyond. That is, on a mid-summer day when the wind is blowing, energy generators cannot give their excess electricity away. Not, of course, that any of us ordinary consumers would get to enjoy free electricity on those occasions, as the companies concerned need to recoup their losses from us.

The capacity auctions offered the best market-based solution for ironing out these massive fluctuations in price (which are currently an inevitable product of intermittent generation) by guaranteeing that supply and demand would always be balanced. This allows a stable market for electricity in which much lower prices can be maintained for end users.

My own market solution (I would prefer to re-nationalise) would be for all contracts for electricity to be based on a “firm” (i.e. 24/7/365 continuous) supply – that is, wind, solar, wave and tidal generating companies would be responsible for balancing their own loads rather than leaving it to the National Grid and the Government to provide the redundant back-up capacity. The reasons nobody favours this are, first, it would expose the true cost of renewable electricity and second, it would result in higher bills to end users.

The situation if capacity auctions are no longer permitted is, however, even worse. Whitehead, like so many politicians, is simply ignorant when it comes to energy issues; imagining that all forms of electricity generation are equal and that coal and gas plants can be unplugged and windmills and solar panels plugged in their place. Bell, however, understands what she is talking about, which is why her comments are sinister. Because, by “incentivising consumers,” she means what is euphemistically referred to as “Demand-side Use Reduction.”

Let us not beat about the bush here, what she is saying is that extortionately high prices will force those at the bottom end of the income ladder to disconnect themselves from power in precisely those kind of adverse weather emergencies when they need electricity most. The supposed result is that this will create the political and economic pressure required to stimulate investment in future storage technologies that might make renewable electricity viable… She might want to consider an alternative future that features Guillotines. At the very least she might want to draw some lessons about why so many ordinary Americans support Donald Trump’s policy of ditching renewables and reverting to coal and gas.

As you made it to the end…

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